UK GDP Brings MPC Dilemma, Unelected Brussels Bureaucrats Strike Again

An “ill wind blows nobody any good”

So says the proverb. That is certainly true of the preliminary Q2 growth data which was released in the UK yesterday. The economy apparently grew at, a snail's paced, 0.3% in the period from April to June. This is an improvement on the (baby snails paced) 0.2% seen in the first quarter and is consistent with the lowering of whole year expectations issued by the IMF earlier in the week.

While anaemic growth is a concern to the government, it has finally settled the chances of a rate hike at next week’s MPC meeting. It will be interesting to see if the two independent members; Ian McCafferty and Michael Saunders, who voted for a hike last time, maintain their hawkish views.

Mark Carney, the BoE Governor has been consistent in his view that the cut in rates following the Brexit Referendum was correct and that the headwinds that has/will bring are consistent with low rates and continued stimulus.

The dilemma facing the MPC is that they will be forced to “sit on their hands” even if they have warning of inflation rising again in July. The oil price which had fallen and was attributed with being a major contributor to the fall in inflation, has started to rise again with Brent up by 10% this month alone. While the oil price remains volatile, driven by several factors, it adds to Carney’s cautious approach.

FOMC on hold until 2018?

The outcome of this week’s FOMC meeting was entirely consistent with recent Central Bank meetings (and likely, those that are imminent). Central Bankers are a conservative bunch, particularly on the eastern side of the Atlantic.

The effort it took for the BoE and ECB to follow the Fed into quantitative easing must have brought many sleepless nights. So, now that the time is approaching for rates to rise and stimulus to be withdrawn their conservatism reappears.

It is likely that the Fed is now on hold for the rest of 2018. Janet Yellen in her press conference managed to give some advance warning of the withdrawal of bond purchases “fairly soon”. The FX market, as usual, wanted more so added their own spin on the comment believing that an announcement will come at the next meeting in September.

Given the IMF’s pronouncement on US growth cutting it’s 2017 full year forecast earlier in the week it is entirely possible that the Fed is on hold until 2018. Indeed, the interest rate futures market is pricing in just a 50/50 chance of further tightening.

Brussels just cannot help itself

We all know that Brexit is going to be a difficult and painful process. It has been drummed into us from all angles. We are aware and know, to a certain extent, what to expect.

A surprising but not wholly unexpected phenomenon this year has been the advent of political stability in the EU. The election results in France and the Netherlands put a lid on nationalistic mutterings that had been growing globally. The fact that Angela Merkel is such a popular leader in Germany has probably sealed that lid despite murmurs in the east of the country.

Why then, does Brussels feel the need to interfere in the national decisions of what are still sovereign nations? The rights and wrongs of the actions of the Polish Prime Minister are not for me to discuss but the incredibly heavy-handed way Brussels has “waded in” does not bode well. Hungary has already assimilated itself into the argument firmly backing Poland’s sovereign rights.

Following Brexit, the next major action for the EU is greater Federalisation. Harmonisation of tax, defence and foreign policy will be necessary if the “experiment” is to continue. This will likely lead to a requirement to join the common currency.

As a confirmed eurosceptic, even I should concede that the EU is starting to take shape and no matter my opinion on the single currency, there is no doubt that the ECB has done a remarkable job. However, the total lack of effective leadership and the actions of unelected bureaucrats is in danger of undermining the whole thing.